Safestyle UK “You will see a big uplift in profitability: Zeus Capital (LON:SFE)

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Safestyle UK (LON:SFE) is the topic of conversation when Zeus Capital Research Analyst Andy Hanson caught up with DirectorsTalk for an exclusive interview.

Q1: Safestyle provided interim results for the six month to 30^th June, what can you tell us about the key highlights?

A1: The business has been in recovery mode because of the issues it experienced last year and the interim results show a good progression in that turnaround.

So, revenue in the first half of the year was up 6% to £64.5 million but importantly, when compared to the second half of last year, the revenue was up 15% and I’m assuming that that level of recovery will continue into the second half of this year.

Looking at the profitability of the business, there was a small loss at the half year but importantly, in Q2 this year they did turn profitable and they expect to improve profitability in Q3 and Q4.

So, for the full year I’ve actually reduced my revenue assumptions slightly by 2% and I’m now assuming the business is broadly breakeven for the year which I think coming off where we were last year is a good performance.

Q2: How would you describe the outlook for the company?

A2: There’s a lot of self-help for this business because of the turnaround so I’m really very positive on the outlook for FY20 and, interesting, I reduced my revenue number by 3% for FY20 which just steams from the flow through from this year for the cut to the revenue.

In terms of profitability, I’ve maintained my profit outlook and if the business is breakeven this year, I’m forecasting for it to do £8 million of profits in FY20 as you get benefits of the operational gearing coming through because the management have done a really good job of creating operational efficiencies and cutting costs.

With the additional revenue coming through next year in that operational gearing, you will see a big uplift in profitability.

Q3: Finally, what are your thoughts on Safestyle UK’s valuation as a whole?

A3: Obviously, it’s breakeven this year so it’s difficult to value off this year’s profits but if you look forward to next year, that £8 million profit equates to 7 pence of earnings so it’s trading on about 7 times next year’s earnings which looks good value when you factor in that the recovery should continue into FY21.

So, in theory, you could get an earnings multiple of 5 times in FY21 if it had a good year so it does look quite compelling and the recovery is becoming increasing tangible.